With regards to absence of arbitrage in models, I was simply saying that there are some real situations where you can add value to a business, but which would be difficult to achieve in an arbitrage free context. The "bleeding to death" argument is textbook. I am not even going to respond to that. It's a very theoretical argument and dealer books with toxic legacy sh!t in them often have other worries.Can you name any of those reasons?Other than that, I can see a lot of reasons why you would want to have better curves than what you describe.Good point. I think in theory it doesn't really matter wether you express all curve delta individually or as one base curve per currency with the remaining curves being spread curves over that principle curve. In practice, as curves in one currency tend to strongly move together, I guess the second alternative saves you some hedging and bid-ask-spread.The only problem I am seeing with what you describe is that you might want to express n-1 of your curves as spreads to one base curve.What would a (very) sophisticated crowd demand? For OIS curves obviously central bank meeting dates - but this works with a straightforward Interpolation method as well, doesn't it? Libor curves I may want to model as spread curves. I guess there is a lot more stuff I'm missing out here, which I'm very interested inIf you have a not overly sophisticated crowd at your end, what you say is probably OK.
I was mostly thinking about more creative curves building. You may want to incorporate some serious micro-structure into your curves, non standard stuff if you have a well defined view. Or another example is curves built off very few instruments, like take a single fly for example. And you don't want to do some stupid textbooky thingy and use a NS model or something.Then interpolation suddenly is everything.
I don't actually agree with what you say about expressing curve deltas individually. Again, the main issue is that you need to see an actual book in action. Rates products are highly redundant in that they all express a notion of bulk interest rate and then there is basis on top. In any given market you use only the very much most liquid instruments to hedge away your exposure and then maybe you do a basis hedge once in a while. If you have risk scattered across vraious instruments it's not very nice. Then you have to be creative, like BBG in their ICVS risk. If you can avoid that, it's much better.